267 International Forestry Review Vol. 6(3-4), 2004 China’s development of a plantation-based wood pulp industry: government policies, financial incentives, and investment trends1 C. BARR and C. COSSALTER Senior Policy Scientist, Forests and Governance Programme, CIFOR, Jalan CIFOR, Situ Gede, Sindangbarang, Bogor Barat 16680, Indonesia Senior Plantation Scientist, Forests and Environmental Services Programme, Jalan CIFOR, Situ Gede, Sindang- barang, Bogor Barat 16680, Indonesia Email: [email protected] and [email protected] SUMMARY The Chinese government is aggressively promoting development of a domestic wood pulp industry, integrated with a plan- tation-based fiber supply and downstream paper production. It is doing so by providing discounted loans from state banks, fiscal incentives, and capital subsidies for establishment of at least 5.8 million hectares of fast-growing pulpwood planta- tions. This article examines the development of bleached hardwood kraft pulp (BHKP) mills in South China, including the Asia Pulp & Paper (APP) Jinhai mill in Hainan Province and the proposed Fuxing pulp mill project in Guangdong Province. Both mills face fiber shortfalls over the medium term, and significant new investments in plantation development will be needed to provide a sustainable fiber supply at the mills? projected capacity levels. However, there are few sites in south- ern coastal China where fiber can be grown at internationally competitive costs. In most instances, the cost of Chinese plan- tation pulpwood will be considerably higher than in countries like Indonesia and Brazil, raising important questions about the economic competitiveness of Chinese pulp producers even within their home market. Keywords: China; wood pulp, plantations, Asia Pulp & Paper, Fuxing INTRODUCTION tic producers modernize their operations and as in- ternational producers seek to capture a share of Chi- During the last 15 years, China has emerged as a lea- na’s growing market (He and Barr, in this issue). ding player in the global pulp and paper sector. Chi- Historically, China’s domestic pulp industry has na has accounted for more than 50% of the world’s been structured around large numbers of small-scale overall growth in paper and paperboard production mills relying heavily on nonwood fibers, including since 1990, when the country produced an aggregate bamboo, bagasse, wheat straw and other agricultural of 13.7 million tonnes across all grades. With 43.0 mil- residues. Much of the new paper and board capacity lion tonnes of paper and board production in 2003, now coming online, however, relies on recovered pa- China is now the world’s second largest producer, per obtained from both domestic sources and im- surpassed only by the United States. The country’s ports (Spencer 2004). Demand for wood-based pulp aggregate paper and board production is expected to has also grown substantially in recent years, particu- reach 68.5 million tonnes per year by 2010, as domes- larly as China’s production of printing and writing pa- per and other high-grade papers has expanded. A re- 1 The research on which this article is based was funded by the cent forecast projects that by 2010, China’s paper and United Kingdom’s Department for International Develop- board industry will consume some 60 million tonnes ment (DfID) and the European Commission’s Asia Pro Eco Programme. The authors gratefully acknowledge the support of fiber annually across all types and grades - that is, of each these institutions. The authors also wish to thank Dr. recovered paper, nonwood pulp, and wood-based Lu Wenming and Dr. Zhang Huaiquing at the Chinese Acade- pulp (He and Barr, in this issue). Demand for various my of Forestry for theit collaboration in this study, and to grades of wood-based pulp is expected to reach 15.1 acknowledge the valuable assistance provided by the Hainan million tonnes per year by 2010 – up from 9.2 million Provincial Forestry Bureau; the Guangxi Provincial Forestry Bureau; the Guangdong Provincial Forestry Bureau; and the tonnes in 2003 – at which point wood pulp will ac- Forestry Bureau of Zhanjiang Prefecture. In addition, the au- count for approximately 25 % of total fiber consumed thors are grateful to two anonymous reviewers for providing by Chinese producers. Bleached hardwood kraft pulp many helpful comments on an earlier draft of this study. The (BHKP) and bleached softwood kraft pulp (BSKP) are authors are, of course, for any errors of fact or analysis. expected to account for roughly two-thirds of this 2 Specific projections of demand for the various grades of wood pulp in 2010 are as follows: BHKP – 6.1 million tonnes; demand, while unbleached kraft pulp (UKP) and BSKP – 4.3 million tonnes; UKP – 2.2 million tonnes; and mechanical and semi-mechanical wood pulp account mechanical/semi-mechanical wood pulp – 2.3 million tonnes for the remainder.2 (see He and Barr, in this issue). To meet this growing demand, the Chinese govern- C. Barr and C. Cossalter 268 ment has aggressively promoted the development of (SFA 2002b). Policymakers recognize the substantial a domestic wood pulp industry. It has done so by set- volumes of wood pulp that China will need to consu- ting ambitious capacity expansion targets for projects me to produce the increasing volumes of paper and that integrate wood pulp and high-grade paper pro- paperboard that are projected over the medium-term. duction and by allocating several million hectares for To restrict the outflow of hard currency and to limit the establishment of fast-growing pulpwood planta- the industry’s reliance on highly cyclical international tions. To support these projects, the government has markets, they have made the development of integra- streamlined the sector’s investment approval process ted wood pulp and paper production within China a and provided a variety of financial incentives and capi- cornerstone of the sector’s industrial strategy. tal subsidies. These include several billion dollars On the other hand, the government has sought to worth of loan interest subsidies, discounted credit, close large numbers of heavily polluting nonwood and extended repayment periods for loans from state- pulp mills. Mechanical pulp mills using agricultural owned banks. residues have been a major source of water pollution In spite of the government’s substantial support, in many parts of China, and the government has re- the development of a competitive wood pulp indus- portedly closed over 4,000 small-scale nonwood pulp try in China faces a number of fundamental challeng- mills since 1999 (Jaakko Pöyry 2001). Within this con- text, Chinese policymakers view the expansion of es. First, the cost of growing wood fiber in China is chemical wood-based pulp production as a means of considerably higher than it is in countries like Indo- replacing the lost capacity with a cleaner and more ef- nesia and Brasil. As such, many analysts question ficient pulping process. By promoting the develop- whether Chinese wood pulp producers will be com- ment of large-scale wood pulp mills, government petitive even within their home market, particularly planners also view this transition as being necessary when they can often import market pulp at a lower to achieve the economies of scale needed to support an cost than producing it themselves (cf Wright 2004; internationally competitive paper industry in China. Kuusisto 2004). Second, there are signs that govern- The government has used a variety of policy measu- ment subsidies are encouraging pulp producers in res to promote the development of a domestic wood some parts of China to develop large-scale mills be- pulp industry. China’s Tenth Five-Year Development fore fully securing a sustainable wood supply. The Plan, covering the period 2001-2005, called for paper areas planted and the productivity levels achieved capacity to increase by 14 million air-dried tonnes per thus far are likely to fall well short of what will be year (Adt/yr) by 2010 and prioritized the expansion of needed to meet the projected demand for wood fiber, projects that integrated fast-growing pulpwood plan- at least over the medium term and perhaps beyond tations, wood pulp production, and high-grade paper (Cossalter 2004a; 2004b). Third, many of the risks and production (SFA 2002b). Specifically, it set a short- social impacts associated with fast-growing planta- term target for domestic wood pulp capacity to triple in tion development in China have not been fully evalua- size from its 2000 level by reaching 2.2 million Adt/yr ted. by 2005. To implement these targets, the National De- In this article, we examine the policies and finan- velopment and Planning Commission (NDRC) in cial incentives that are now being used by the Chinese 2001 issued a list of 42 priority pulp and paper pro- government to promote the development of a domes- jects which will involve approximately US$ 24 billion tic wood pulp industry and integrated plantation re- in investment from both domestic and foreign sour- source base. We then assess the development of blea- ces by 2010 (AF&PA 2004). The NDRC has scheduled ched hardwood kraft pulp (BHKP) mills in South Chi- 13 of these projects which involve the integration of na, where the largest investments in new pulp capaci- high-grade paper production with fast-growing plan- ty and fast-growing plantations are now being made. tations – including three large-scale chemical pulp The wood supply strategies of the Asia Pulp & Paper mills – for fast-track investment approval and govern- (APP) Hainan Jinhai mill project in Hainan Province ment financial incentives. and the proposed Fuxing pulp mill project in Guang- As in other key sectors, the government has of- dong Province are discussed in detail. fered significant financial incentives and capital sub- sidies to support priority pulp and paper projects.